Qualitative modeling is one promising approach to the solution of difficult tasks in automation if quantitative process models are not available. This contribution presents a new concept of qualitative dynamic process modeling using so called Dynamic Fuzzy Systems. In contrast to common approaches of fuzzy modeling [1 ], the dynamic system is completely described in the fuzzy domain: The fuzzy information about the previous state is directly applied to compute the system's current state, i.e. the delayed fuzzy output is fed back to the input without defuzzification. Knowledge processing in such Dynamic Fuzzy Systems requires a new inference method, the inference with interpolating rules. This yields the framework of a new systems theory the essentials of which are given in further sections of the paper. First, an identification method is presented, using a combination of linguistic knowledge and measurements. Next, a stability definition for Dynamic Fuzzy Systems as well as methods for stability analysis are given. Finally, a fuzzy model-based fuzzy controller design method is developed. The identification and fuzzy controller design for a two tank system demonstrate the significance of the new systems theory.